Nicaragua

In December, three top-level commanders of the Sandinista National Liberation Front toured the United States under the sponsorship of the Council of the Americas, a group representing major U.S. investors in Latin America. The purpose of the Nicaraguan leaders' visit: to meet with U.S. businessmen and discuss the role of foreign capital in rebuilding the war-torn country's shattered economy.

The leaders of the Nicaraguan revolution met with an enthusiastic public reception from U.S. business. In New York, Minister of Agriculture Jaime Wheelock received a tumultuous ovation following his speech at a Council forum. In San Francisco, the Sandinista leaders were toasted as the "George Washingtons of Nicaragua" by the president of Castle and Cooke, a company noted for its extensive banana operations throughout Central America.

There is a touch of irony in these highly publicized signs of support, coming as they do from companies which for years operated in Anastasio Somoza's Nicaragua-a laissez-faire haven for investment and profit tempered only by the universally-acknowledged need to make illicit payments to the dictator's family. But the U.S. business community's enthusiasm-and the irony it entails-is only superficial. Beneath the surface lies a set of complex forces that will determine the future role of multinationals in Nicaragua, whose insurrection may yet emerge as a watershed in the relations among Latin American oligarchies, the populations they rule, and international business. For while leaders of the Sandinista government can point to the negative role of foreign investment under Somoza, they have yet to establish specific guidelines governing the activities of foreign corporations in their revolution.

Under Somoza, according to the Sandinista analysis, foreign business promoted a highly unequal distribution of wealth in Nicaragua through investment in industries producing luxury consumer goods with a high import content. Since Somoza's goal was personal enrichment, he made no effort to harness the development potential of foreign investment through taxation, profit repatriation limits, or regulations requiring the use of local goods and services. Maintaining the dictator's good will through the payment of regular "commissions," multinationals enjoyed one of the most wide open investment climates in Latin America. In 1978, on the eve of the insurrection, direct foreign investment in this country of 2.4 million people stood at $170 million. U.S. firms accounted for 75 percent of the total.

The role of international banks in the Nicaraguan economy far outweighed the activities of foreign corporations. While private banks supplied Somoza with capital for most of his rule, the dictator stepped up his borrowing as political opposition heightened. A 1979 study by the Economic Commission for Latin America (ECLA) concludes that as political conflict became more acute, the government "increasingly sought access to international financial support, especially from private sources."

The growth of the country's foreign debt reflects this conclusion. In 1976, Nicaragua faced a foreign debt of $642 million, with about $324 million controlled by international banks. By 1979 the external debt had more than doubled, reaching $1.5 billion. Its structure changed as well; in the last years of the Somoza regime, Nicaragua's foreign debt became heavily skewed towards short-term high interest loans.

The government's cautious attitude towards foreign investment, however, does not stem merely from dissatisfaction with the role of multinationals under Somoza. In the long-term, most Sandinista leaders seek a radical transformation of their society-some variant of socialism, most suggest. Their approach is a gradualist one, recognizing the need for a mixed economy in the foreseeable future. Their long-term visions, however, depend upon the success of their urgent short-term mission: triggering the immediate reactivation of an economy brought to its knees by war and a major flight of capital during the last months of Somoza's rule.

According to ECLA, over 25 percent of the country's factories suffered damage to plant and inventory during the popular insurrection. Ninety percent of all plants shut down during the conflict's final stages. As a result, industrial production in 1979 declined by 30 percent compared with 1978.

The countryside fared even worse. Cotton, which traditionally has generated about 25 percent of the country's foreign exchange, went virtually unplanted. Production of beans, a key subsistence crop, fell by nearly 25 percent. Corn production plunged by over 50 percent.

Wholesale pillaging by the Somoza family accounted for an unparalleled flight of capital during the last months of the revolution. Somoza-held ranches slaughtered, and exported livestock at breakneck speed. Members of the Somoza government fleeced the warehouses of Corinto, the country's major port, and escaped in small boats to Honduras.

The government hopes to bring industrial and agricultural production up to pre-war levels within two years. The pragmatic leaders recognize that without the support of the private sector, this goal cannot be reached. Domestically, given the total lack of a state sector under Somoza, private enterprise has a virtual lock on the technical and managerial skills needed to reactivate production. The leaders also recognize the need for transfers of both public and private capital and, to a lesser extent technology, from abroad. Seeking non-alignment and not wishing to turn sharply to Soviet aid, as Cuba did in the early sixties, the government continues to seek such transfers from the West. The U.S. Congress, for instance, recently approved a $75 million aid package for Nicaragua, 60 percent of which is allocated to rejuvenate local private enterprise. The aid package constitutes an effort to shore up moderate forces in the country, U.S. ambassador to Nicaragua Lawrence Pezzulo says.

The realities of Nicaragua's financial situation-over $600 million in foreign loans fell due in 1979, while the central bank held reserves 'of only $3.5 million-should promote a close continuing relationship between the new government and the international banks.

Two months after the Sandinista victory, Nicaraguan junta member Daniel Ortega startled Western financiers by suggesting to the U.N. General Assembly that "Nicaragua's foreign debt should be assumed by the international community, especially the developed countries and above all those who supported the Somoza regime." Since that September speech, Nicaragua and the commercial banks have moved towards compromise. In a recent interview, Pierre Penalba, vice minister of the National Fund for Reconstruction, the ministry established to confront the debt problem, presented the government position. "We will not compromise the goals of the revolution just to pay a debt with money that is necessary for the reactivation of the economy. This doesn't mean we won't pay; but we need a plan that is congruent with our needs."

The government's present position reflects its pragmatic assessment that failure to come to terms with the commercial banks will preclude any new foreign borrowing. The banks, for their part, are also anxious to reach accommodation. The alternative to compromise-debt repudiation by the junta would inflict substantial financial losses on the banks (particularly Citibank and Bank of America) and establish a dangerous precedent for future Third World revolutions. The two sides have met twice already in Mexico City. A third meeting is scheduled for Managua in mid-March.

Observers close to the talks suggest the banks will offer generous terms for rescheduling the debt, perhaps including a moratorium on debt service for 1980 and 1981. Nicaraguan leaders are reluctant to repay loans that never reached Nicaragua, but were funnelled to Somoza-held accounts abroad, but the banks will probably hold the line against actually writing off any debts. "Such a step would amount to an admission of guilt on the part of the banks," observed one leading private Nicaraguan businessman. "It's not likely they'll agree to do that." Instead, it appears the banks will attempt to tacitly accept some of this questionable debt burden by softening the terms on which all of the loans are rescheduled.

The future of direct foreign investment turns on a more complex and less predictable set of forces. As Nicaraguan officials readily admit, the major concern of foreign investors is the Nicaraguan government's long-term commitment to a role for the private sector. There has been little popular opposition to the nationalizations that have occurred thus far. Last November, the government nationalized the near-bankrupt domestic insurance and banking industries, and three investments controlled by foreign firms. Noranada Mines, a Canadian multinational, and two U.S. companies Asarco and Rosario Resources were all affected by the government's decision to nationalize the country's mining sector. Compensation negotiations are in progress, and the owners of the nationalized assets have expressed satisfaction with the tenor of discussions. The bulk of the state-controlled sector, however, consists of assets seized from the Somoza family, which the government estimates controlled 40 percent of the country's arable land and 30 percent of industrial production. The Agrarian Reform Institute is using the seized lands to form state farms and communes for the benefit of the poorest peasants.

The government has adopted a cautious policy on. the question of further nationalizations of foreign assets. Vice-Minister of' Planning Federico Cerda explains that, as natural resources, the mines represented a special case, and that no major waves of nationalizations are planned for the foreseeable future. "All poor countries have a right to find mechanisms which permit the rational utilization of scarce resources," said Cerda. "This is not communism, but rationalism."

One potential area of conflict between the government and foreign enterprise is negotiations over nationalization of the country's export trade. The government has declared the sector under state control, and multinationals will be required to sign marketing contracts with the governments. Despite the policy, many companies continue to export goods privately, as under Somoza. Castle and Cooke, for instance, still exports the bananas it buys from Nicaraguan contract growers. According to Raphael Pagan, Castle and Cooke vice president for government relations, the company is involved in "very sensitive negotiations" over the future of its export operations. "There is a great difference between the policy that is announced and what has been implemented." Pagan suggests that the Nicaraguan government may find there is nothing to gain economically from nationalizing trade in minor exports, like bananas.

A second concern, voiced by both local and foreign businessmen, is the government's labor policies. Since the July revolution, numerous strikes have occurred in both foreign and locally-owned plants. Business executives blame these strikes on the "anti-management" climate created by the Sandinistas. The government rejects these claims. "After all the years of repression under Somoza, some labor unrest is normal," says Arturo Cruz, Jr., economics officer at the Nicaraguan Embassy in the United States. "This does not mean it is efficient or productive." Cruz points out that his government has mandated a wage freeze during the reactivation period,, a move that has upset some workers' hopes for immediate economic relief.

Faced with uncertainty, U.S. firms have adopted a wide range of policies towards their Nicaraguan operations. Pillsbury Company typifies one approach. Pillsbury was fortunate not to sustain any damage to its cooking oil plant during the months of fighting and, given the relatively small amount of capital committed to the 25-employee, labor intensive plant, decided to resume its operations in early November. Booth Fisheries, on the other hand, approached the Nicaraguan government to buy a majority of its interest in its Nicaraguan subsidiary, which operates a shrimp-fishing fleet. Finally, there is the middle ground, represented by H.B. Fuller. The Minneapolis-based paint company had two major plants in Managua, a paint factory and an adhesives factory, each employing around 50 people. In July, the paint plant sustained major damage when it was set on fire. Now, Fuller executive David Croonquist says his company "is trying to indicate that it can be part of a positive solution, rather than part of a problem." For Fuller, this meant repairing minor damage to the adhesives factory and reopening it. The paint factory will remain unrepaired and closed, "until we know more about the government's economic policies," Croonquist said.

Representatives of the U.S. and Nicaraguan governments, as well as local and foreign businessmen, agree on one prediction: no major new foreign investors will enter Nicaragua in the coming year. Ambassador Pezullo envisions no new investments for two to three years, but adds that "if the domestic private sector prospers, word will get out," precipitating new multinational interest. Lawrence Birns, director of the highly-respected Council on Hemispheric Affairs, agrees with Pezullo's assessment. He speculates that business may be eager to invest for other than strictly financial reasons. "The American business community would like to go to Nicaragua, in order to demonstrate its adaptability," he says.

While uncertainty remains, the leaders of the new government appear convinced that some form of accommodation will be reached, and that foreign business will play a major role in the reconstruction of the country. Last fall, junta member Daniel Ortega lauded the role of the local private sector in reconstruction. "In Nicaragua, there is the kind of businessman who doesn't flee, who doesn't hide his money, but who invests it and puts it at the service of the revolution." But Nicaraguans must develop more comprehensive guidelines for the role of foreign investment, before this observation can be put to the test for multinational business.

Charles Roberts, a student of Latin American economics and politics at Harvard University, recently returned from a month of travel in Nicaragua.